Question

When the price of a commodity falls by 80%, the quantity demanded increases by 100%. Find out its price elasticity of demand.

E_d = `100/80 = 1.25`

When the price of a commodity falls by 80%, the quantity demanded increases by 100%. Calculate the price elasticity of demand of the commodity. 

Answer 1

Price Elasticity of Demand (Ed) = `("Percentage Change in Quantity Demanded"​)/("Percentage Change in Price")`

E_d = `(100%)/(-80%)`

= `10/8`

E_d = 1.25

This means the price elasticity of demand is 1.25, which indicates that the demand is relatively elastic. However, it is important to remember the negative sign when interpreting the relationship, as it reflects the inverse relationship between price and quantity demanded.